Because the relationship between interest rates and value depends on the confluence of many factors, investors should not expect that value-oriented investments will respond consistently to rate increases or decreases, according to Acadian Asset Management.
Vladimir Zdorovtsov, senior vice president, director, global equity research, and Seth Weingram, senior vice president, director, client advisory, said in the present environment, if robust economic activity caused real interest rates to rise then cyclically sensitive low price-to-book (P/B) stocks might benefit.
“The same stocks might suffer, however, if rates rise due to inflationary expectations that also trigger fears of central bank tightening,” they said.
“By the same token, falling interest rates do not necessarily bode poorly for value, despite the post-Global Financial Crisis (GFC) experience.
“Investors should also not expect that different implementations of value will respond uniformly to rising or falling rates.
“Unrefined value portfolios often have substantial and time-varying exposure to risk factors that, while not intrinsic to harvesting fundamental mis-pricings that give rise to value-related premia, may greatly influence their apparent interest rate sensitivity.”
Standalone value implementations that served the basis for popular narratives about behaviour, they said, would exhibit different sensitivity to interest rates.
“[That] may exhibit very different sensitivity to interest rates than multifactor investing approaches that interact value with other types of signals, including information about quality and fundamental growth,” they said.
“The complexity and context dependence of the relationship between value and rates does not preclude the possibility of improving value-oriented equity strategies by incorporating interest rates as an input into forecasting or as a risk control.
“Investors should not expect that timing value based on interest rates will be easy, however.
“Moreover, making use of information about interest rates at minimum calls for a disciplined investment process in which the incremental benefit can be precisely evaluated. Otherwise, desired effects will likely be swamped by unintended consequences.”